Should Investors Consider FedEx?

With shares of Federal Express Corporation (NYSE:FDX) trading at around $100.28, is FDX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The future performance of FedEx comes down to one simple question: is there worldwide economic growth? With the United States, Japan, and the ECB easing monetary supply, the answer to that question would be yes. Whether this growth is real or artificial is a different question. And whether the growth is sustainable or not is the best question of all. However, these policies greatly increase the odds of stock appreciation around the world. Easy money and low interest rates have a chain reaction in almost every industry.

FedEx has seen steadily increasing revenues on an annual basis. This is a good sign, especially considering many companies saw revenue declines in 2012. FedEx has also seen steadily increasing earnings on an annual basis.

In regards to FedEx vs. United Parcel Service (NYSE:UPS), UPS has been the recent winner in regards to stock performance. It also offers a higher yield of 2.80 percent. FedEx currently yields 0.60 percent. On the other hand, FedEx has outperformed UPS by a wide margin since 2000. FedEx also has stronger margins, better debt management (by a landslide), and its stock is much cheaper. In regards to the latter, FedEx is trading at 17 times earnings whereas UPS is trading at 98 times earnings.

When it comes to company culture, FedEx scores well above average. According to Glassdoor.com, employees have rated their employer a 3.6 of 5, and 75 percent of employees would recommend the company to a friend. In addition to that, 90 percent of employees approve of CEO Fred Smith.

The chart below compares fundamentals for FedEx and UPS.

FDX

UPS

Trailing P/E

17.56

98.44

Forward P/E

13.39

15.60

Profit Margin

4.12%

1.61%

ROE

11.06%

15.15%

Operating Cash Flow

4.79B

6.69B

Dividend Yield

0.60%

2.80%

Short Position

1.20%

2.30%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

FedEx has underperformed UPS over the past three years, and this isn’t a great performance considering recent broad market moves, but gains are gains.

The debt-to-equity ratio for FedEx is stronger than the industry average of 0.50. It’s also much stronger than the debt-to-equity ratio for UPS. UPS might have outperformed FedEx over the past three years, but FedEx is in a more manageable situation going forward, especially if interest rates increase.

Debt-To-Equity

Cash

Long-Term Debt

FDX

0.14

3.37B

2.24B

UPS

3.15

7.33B

12.72B

E = Earnings Are Strong

Earnings have steadily improved over the past three years; revenue has increased over the past two years.

Fiscal Year

2008

2009

2010

2011

2012

Revenue ($) in billions

37.95

35.50

34.73

39.30

42.68

Diluted EPS ($)

3.60

0.31

3.76

4.57

6.41

When we look at the last quarter on a year-over-year basis, revenue has increased and earnings have declined. Revenue and earnings have both declined on a sequential basis.

Quarter

Feb. 29, 2012

May. 31, 2012

Aug. 31, 2012

Nov. 30, 2012

Feb. 28, 2013

Revenue ($) in billions

10.56

11.01

10.79

11.11

10.95

Diluted EPS ($)

1.65

1.735

1.45

1.39

1.13

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

UPS recently lowered guidance. This isn’t necessarily a bad sign, but it’s not going to boost investor confidence for the industry. Consumer confidence has been steady recently, but whether that confidence is sustainable or not is questionable. If the consumer weakens, then many of them will opt for a cheaper alternative, such as the USPS.

Federal Express is an excellent company with strong historical stock performance. On the other hand, it’s at the mercy of the consumer. That being the case, there has been no sustainable momentum in the stock price as of late. This pattern is likely to continue, making it a better trade than an investment. There are better investment opportunities available.